The New Kid On The Blockchain: Legislative Acceptance of Smart Contracts

Mohammad Tashakor

April 2018

Recent months have seen several states moving to embrace blockchain technology and its promise of making governmental services more efficient and secure. On March 22, 2018, Tennessee passed legislation that establishes the legal authority of smart contracts in the marketplace.1Cameron Bishop, Tennessee Enacts Law to Legalize Blockchain & Smart Contracts, LEGAL GAMBLING & L. (Mar. 26, 2018), https://www.legalgamblingandthelaw.com/news/tennessee-enacts-law-to-legalize-blockchain-smart-contracts/. The Tennessee Senate Bill, referred to as SB 1662, acknowledges that smart contracts “may exist in commerce” and that smart contracts are valid and enforceable under state law.2S.B. 1662, 110th Gen. Assemb., Reg. Sess. (Tenn. 2018). Smart contracts are self-executing contracts that are converted to computer code and stored on the blockchain system, facilitating the exchange of money, property, or anything else of value without the need of an intermediary.3Ameer Rosic, Smart Contracts: The Blockchain Technology That Will Replace Lawyers, BLOCKGEEKS, https://blockgeeks.com/guides/smart-contracts/ (last visited Apr. 17, 2018). In much simpler terms, smart contracts are essentially “if-then” agreements that execute when certain conditions are met.4Ian Edwards, The Basics of Smart Contracts, MEDIUM (Nov. 30, 2017), https://medium.com/@ianedws/the-basics-of-smart-contracts-233eb613b932.

The Tennessee law is part of a much larger trend of governmental initiatives to research blockchain technology and its applications. A recent report released by the Joint Economic Committee emphasized how blockchain can be a powerful tool to secure America’s digital infrastructure.5H.R. REP. NO. 115-596, at 201 (2018). The report recognized several potential applications of blockchain in the government context, including storing medical records and managing the electrical grid, and encouraged government agencies at all levels to “examine new uses for this technology that could make the government more efficient in performing its functions.”6Id. at 226.

Tennessee is not the only state to pass blockchain-friendly legislation. Last year, Arizona passed a similar bill that recognizes the validity of smart contracts under state law.7Stan Higgins, Arizona Governor Signs Blockchain Bill into Law, COINDESK (Mar. 31, 2017), https://www.coindesk.com/arizona-governor-signs-blockchain-bill-law/. The legislation, which was passed with a near-unanimous vote, acknowledges that a contract secured through blockchain technology is considered to be an electronic record.8Id. Similarly, Wyoming passed a measure that accepts blockchain-based electronic records for legal purposes.9 Matthew De Silva, Wyoming Legislature Goes All In on Blockchain, Cryptocurrency Bills, ETHNEWS (Mar. 8, 2018), https://www.ethnews.com/wyoming-legislature-goes-all-in-on-blockchain-cryptocurrency-bills. Delaware, known for being a bellwether for business legislation, has passed a bill that legalizes issuance, transfer, and redemption of corporate shares through a distributed ledger, paving the way for publicly traded stocks to one day be transacted through blockchain technology.10Matthew De Silva, Delaware Senate Advances “Distributed Ledger Shares” Bill [UPDATED], ETHNEWS (June 14, 2017), https://www.ethnews.com/delaware-senate-advances-distributed-ledger-shares-bill. Finally, other states like New York, Nebraska, Illinois, and Florida have proposed initiatives that would explore possible innovations through the use of smart contracts and blockchain technology.11See Nikhilesh De, Smart Contracts Now Recognized Under Tennessee Law, COINDESK (Mar. 23, 2018), https://www.coindesk.com/blockchain-bill-becomes-law-tennessee/.

Although the validity of smart contracts under state law is a new phenomenon, experts have been studying this technology for some time to learn about ways it can be applied in securing and speeding up business operations. To that effect, smart contracts have proved useful in supply chain management and the simplification of tracking goods in the marketplace.12Aleksandra Dikusar, Smart Contracts: Industry Examples and Use Cases for Business, XB SOFTWARE (Oct. 17, 2017), https://xbsoftware.com/blog/smart-contracts-use-cases/. It is no surprise then that state governments can employ this technology to both expedite and make efficient its commitments to the community.13See Nick Chong, Governmental Blockchain Adoption: Efficient and Transparent Government Systems, BITCOINIST (Feb. 26, 2018), http://bitcoinist.com/governmental-blockchain-adoption-efficient-transparent-government-systems/. For example, Medicaid claims can be easily automated with the use of smart contracts—reducing manual operations that require a lot of human action and ultimately reducing costs.14See David Randall et al., Blockchain Applications and Use Cases in Health Information Technology, J. HEALTH & MED. INFO., https://www.omicsonline.org/open-access/blockchain-applications-and-use-cases-in-health-information-technology-2157-7420-1000276.pdf (last visited Apr. 20, 2018). Smart contracts are also a cost-effective way to facilitate and track issuance of food stamps and welfare payments to the underprivileged.15 Cheah, Can Blockchains Revolutionise Social Welfare Programmes?, STEEMIT, https://steemit.com/blockchain/@cheah/can-blockchains-revolutionise-social-welfare-programmes (last visited Apr. 20, 2018). And finally, student loans issued by governments can be streamlined and disbursed via a trusted and secured system.16Ivan Zone, Loan Securitization Using Smart Contracts, MEDIUM (Feb. 28, 2018), https://medium.com/@_ivan_zone/loan-securitization-using-smart-contracts-34cc7a146914.

At the same time, the concept of smart contracts is fairly new, which creates certain challenges. First, only a small number of states acknowledge the legal effect of smart contracts, which poses questions regarding the effect on interstate commerce.17 Mike Orcutt, States That Are Passing Laws to Govern “Smart Contracts” Have No Idea What They’re Doing, MIT TECH. REV. (Mar. 29, 2018), https://www.technologyreview.com/s/610718/states-that-are-passing-laws-to-govern-smart-contracts-have-no-idea-what-theyre-doing/. Second, there is a lack of uniformity with respect to the states that have embraced this technology, creating uncertainty and the potential for conflict in interstate business transactions.18Id. Finally, the bills that have been passed are not comprehensive and include poorly defined terms, again creating confusion and defeating the purpose of transaction simplification, especially in interstate commercial situations.19Id.

Blockchain and smart contracts technology is an exciting innovation with the potential to simplify personal, governmental, and commercial transactions, reducing the costs of delivering such services and also potentially reducing the need for escrow and other intermediary services that are currently required by such transactions. Although the technology has its advantages, the lack of uniform laws poses a significant obstacle to the adoption of smart contracts in interstate commerce, but this obstacle is not insurmountable.20See Id. In the near future, further discussion and investigation of smart contracts is warranted to insure that the potential is real and that any potential security issues are properly and thoroughly examined. Once thoroughly vetted, uniform laws may then be developed to harmonize national and international transactions and more effectively utilize the potential of this new technology while retaining current legal and security protections.